Craniofacial malformations represent one of the major groups of congenital birth defects in human population. Babies born with defects often suffer multiple handicaps that significantly compromise the quality of their lives. Cranial neural crest (CNC) cells are important progenitors for the morphogenesis of craniofacial structures. Growth and transcriptional factors are critical regulators for the fate of CNC cells. Alteration of signaling by these factors results in craniofacial malformations. Our previous studies on the regulation of early craniofacial development have identified that transforming growth factor-beta (TGF-beta and transcription factors Msx1 and LEF1 are responsible for determining cell phenotypes during embryogenesis. Using the two-component genetic system for indelibly marking the progenies of neural crest cells, we provide the first in vivo evidence that mutations of TGF-beta2 or LEF1, or Msx1 affect the fate of CNC cells, indicating that each one of these molecules has a critical role in regulating CNC cells. There are significant overlaps among the expression patterns of these regulatory molecules during tooth morphogenesis. Furthermore, TGF-beta signaling can negatively regulate the expression of Msx1, which can be further repressed by the possible synergistic interaction between TGF-beta signaling Smad and LEF1. Sequence analysis of Msx1 promoter reveals multiple Smad and LEF/TCF binding sites, providing the molecular basis for the synergistic interaction between TGF-beta signaling Smad and LEF1 in regulating Msx1 expression. Msx1 is critical for proliferation and differentiation of CNC cells. Alteration of Msx1 expression may affect the proper CNC differentiation. Thus, we focus our study to explore the hierarchy of TGF-beta2, LEF1 and Msx1 in regulating CNC cells and test the hypothesis that each of the signaling molecules (TGF-beta2, LEF1 and Msx1) has specific regulatory roles for CNC cells during craniofacial development and the cooperation of TGF-beta signaling Smads and LEF1 alters the expression of Msx1, thereby, determining the fate of CNC cells during tooth morphogenesis. Ultimately, this study will contribute to our understanding on how the TGF-beta signaling cascade regulates the fate of CNC during normal craniofacial development and how pathway disruption can lead to craniofacial malformations.